Japan economy: Questionable data or questionable policies?

The misreporting of data by the Ministry of Health, Labour and Welfare (MHLW) is the latest scandal to hit the Japanese government. The prime minister, Shinzo Abe, has faced several scandals since he returned to power in December 2012 and we expect him also to brave the current one. However, the data scandal has raised questions about his signature economic policy, "Abenomics", and its ability to spur growth and lift prices. With elections for the House of Councillors (the upper house of the Diet, or parliament) due in July, the outcome of this episode could undermine the dominance of the ruling coalition in that chamber.

The scandal involving the MHLW came to light in January, when several inconsistencies in the ministry's monthly labour survey were reported by local newspapers. The ministry is supposed to collect data from all firms that employ 500 or more employees, although it can use an alternating sample of workplaces that employ fewer people. However, the ministry surveyed only a third of such big employers in Tokyo between 2004 and 2017. Larger firms tend to pay higher wages, but since several of them were excluded from the surveys, the reported wages were understated in those years. The monthly labour report switched back to the correct methodology in 2018, and showed the wage rise to be much sharper in that year owing to a lower base of comparison in 2017.

The lack of consistency in the labour market data has far-reaching implications, as it feeds into broader income data and consumer sentiment surveys. Data from the MHLW also determines the individual basis of workers' unemployment benefit claims, resulting in significant errors in the calculation of benefits being paid out to citizens. It has been estimated that nearly 19m people were affected by the misreporting. The government has added ¥650m (US$5.9m) to its budget for fiscal year 2019/20 (April/March) to cover the cost of compensating for such benefits. On January 28th, at his annual policy speech at the opening session of the Diet, Mr Abe apologised for the misreporting of the data and stated that the people affected would be compensated. However, the government continues to deny that the incorrect data had any impact on growth data based on consumption and investment activities.

Not the last straw

Scandals related to data collection are not new in Japan. In July 2018 the MHLW released findings from its own investigation into errors found in old working-hours data that were used in the deliberation of work reform bills passed in June 2018. The legislation also included an amendment to the Labour Standards Act and sought to limit overtime work to 45 hours per month, with a maximum of 360 hours in a year. Additionally, in November 2018 the Ministry of Justice (MOJ) tweaked responses to its survey of reasons why some migrant workers under the "trainee" labour import scheme went missing from their workplaces. The MOJ said that it overstated the contribution of low wages to the total, but understated the proportion of workplace abuses, as reasons for their disappearances in earlier survey findings.

The data scandals have cast long shadows on the government's credibility and policymaking. Mr Abe's flagship economic policy of Abenomics focuses on flexible fiscal and accommodative monetary policy coupled with structural reforms. The government claims that its Abenomics programme has contributed to a mild economic recovery that has spanned seven years to 2018. As part of the structural reforms, Mr Abe had long sought to amend Japan's immigration laws to address labour shortages. However, the survey tweaks by the MOJ suggest that they could have been made to make it easier for the Diet to pass the immigration reform bill in 2018.

Damage control

The reasons for the MHLW returning to the correct survey methodology in 2018 remain unclear. The latest scandal has raised questions about the extent to which government officials were involved in the poor labour data collection methods. An independent third-party committee was set up in mid‑January to investigate the details of the scandal and found that the MHLW did not intentionally manipulate the data. However, the integrity of the committee itself has come into question, as interviews at the hearings were also conducted by ministry officials.

The latest data scandal has cast doubt on the government's policymaking rationale over the years, as the faulty data helped the government to flaunt the success of its Abenomics programme. If further probes of the labour statistics scandal implicate Mr Abe, then it will severely weaken the government's ability to promote Abenomics during the remainder of his term as president of the Liberal Democratic Party until September 2021. However, the opposition now looks primed to pursue the case further to its own advantage, as the key polls for half the seats in the upper house of the Diet are up for election in July 2019. Mr Abe and his cabinet have faced and survived several scandals in the past, such as the land sale scandal to a school operator. As a result, we expect him to brave the latest wave of criticism from the opposition as we believe that the ruling coalition will maintain its majority in the upper house in the upcoming polls.